Question

The Delhi Cloth Mills Ltd. invited applications for 10,000 Shares of Rs 100 each at a premium of Rs 10 each payable as below:

Rs 50 on Application;

Rs 35 on Allotment (including premium), and

Rs 25 on Call.

Applications for 15,000 shares were received. Applications for 2,500 shares did not get any allotment and their money returned. Allotment was made pro-data to the remaining applicants.

Mr. A was allotted 400 shares. He failed to pay the amount due on allotment and call money.The company forfeited his shares and subsequently re-issued at Rs 105 per share.

(a) Show the journal entries in the books of company.

(b) Which value has been affected by rejecting applications for 2,500 shares? Suggest some better alternative.

Answer 1

(a) JOURNAL

$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F}& \text{Dr (Rs)}& \text{Cr. (Rs)}\\ & \text{Bank A/c}& \text{Dr.}& & 7,50,000& \\ & \text{To Share Application A/c}& & & & 7,50,000\\ & \text{(Amount received on application)}& & & & \\ & \text{Share Application A/c}& \text{Dr.}& & 7,50,000& \\ & \text{To Share Capital A/c}& & & & 5,00,000\\ & \text{To Share Allotment A/c (2,500}\times \text{Rs 50)}& & & & 1,25,000\\ & \text{To Bank A/c (2,500}\times \text{Rs 50)}& & & & 1,25,000\\ & \text{(Application money adjusted)}& & & & \\ & {\text{Bank A/c}}^{\left(1\right)}& \text{Dr.}& & 2,16,000& \\ & \text{To Share Allotment A/c}& & & & 2,16,000\\ & \text{(Amount received on allotment except on 400 shares of A)}& & & & \\ & \text{Share Allotment A/c}& \text{Dr.}& & 3,50,000& \\ & \text{To Share Capital A/c}& & & & 2,50,000\\ & \text{To Securities Premium Reserve A/c}& & & & 1,00,000\\ & \text{(Allotment money,including premium due on 10,000 shares at Rs 35 per share)}& & & & \\ & \text{Bank A/c}& \text{Dr.}& & 2,40,000& \\ & \text{To Share First and Final Call}& & & & 2,40,000\\ & \text{(first and Final call received on 9,600 shares at Rs 25 per share)}& & & & \\ & \text{Share First and Final Call A/c}& \text{Dr.}& & 2,50,000& \\ & \text{To Share Capital A/c}& & & & 2,50,000\\ & \text{(first and Final call due on 10,000 shares at Rs 25 per share)}& & & & \\ & \text{Share Capital A/c}& \text{Dr.}& & 40,000& \\ & {\text{Securities Premium Reserve A/c}}^{\left(2\right)}& & & 4,000& \\ & \text{To Share Allotment A/c}& & & & 9,000\\ & \text{To Share First and Final Call A/c}& & & & 10,000\\ & \text{To Share Forfeiture A/c}& & & & 25,000\\ & \text{(Forfeiture of 400 shares of A)}& & & & \\ & \text{Bank A/c}& \text{Dr.}& & 42,000& \\ & \text{To Share Capital A/c}& & & & 40,000\\ & \text{To Securities Premium Reserve A/c}& & & & 2,000\\ & \text{(Re-issue of 400 forfeited shares @ Rs 105 per share)}& & & & \\ & \text{Share Forfeiture A/c}& \text{Dr.}& & 25,000& \\ & \text{To Capital Reserve A/c}& & & & 25,000\\ & \text{(Balance of Share Forfeiture A/c transferred to Capital Reserve A/c)}& & & & \end{array}$

(1) (A) Excess amount received from A on application:

A has been allotted 400 shares. He must have applied for more shares.

If Shares allotted were 10,000, shares applied for were = 12,500

$\therefore$ If Shares allotted were 400, shares applied for were =$\frac{12,500}{10,000}\times 400=500$ shares

Excess application money received from A:

500 shares - 400 shares =$100\text{Shares}\times \text{Rs 50}=Rs5,000$

$\begin{array}{ccc}\text{(B) Amount due from A on allotment:}& & \text{Rs}\\ \text{400 Shares}\times \text{Rs 35}& =& 14,000\\ \text{Less: Excess received from A on application}& =& \underset{–}{5,000}\\ \text{Net amount received from A on allotment,which has}& & \\ \text{not been received}& =& \underset{–}{9,000}\end{array}$

$\begin{array}{ccc}\text{(C) Total amount due on Allotment 10,000 Shares}\times \text{Rs 35}& =& 3,50,000\\ \text{Less: Excess amount received on applications}& =& 1,25,000\\ \text{Balance Due}& =& \overline{2,25,000}\\ \text{Less: Amount not from A on allotment}& =& \underset{–}{9,000}\\ \text{Net amount received on allotment in Cash}& =& \underset{–}{2,16,000}\end{array}$

(2) Since the question is silent as to the utilisation of excess application money of Rs 5,000 (received from A) between share capital and securities premium, it has been assumed that the entire excess of Rs 5,000 is exclusively for Share Capital and hence 'Securities Premium Reserve Account' has been debited in the entry for forfeiture.